International

Tough decisions ahead for EU on Greece bailout: IMF

ATHENS: The IMF’s release of its next block of aid for Greece still requires tough decisions to be taken by Europe, it warned Tuesday, as ratings agencies and German banks cast doubt on one part of a planned second bailout.

A senior Greek official also said the government expected parliament to vote by the end of June on its medium-term austerity plan, a condition for the new international package as Athens struggles to avoid defaulting on its debt.

A team from the IMF, EU and European Central Bank reached an agreement last Friday, under which Athens would impose more austerity and faster privatization to cut its budget deficit.

But Bob Traa, the IMF’s senior representative in Greece, said the European Union needed to do more work before the Fund’s board could release more loans.

“I believe there is a summit in Europe, in June, where some hard nuts need to be cracked. They need to make some decisions, and then we will go to our board and disburse in early July,” he told a banking conference.

EU officials are struggling to find a solution for Greece’s financing needs for the next few years which avoids triggering a default but pushes some of the burden onto the private sector.

“What needs to be decided is how to fill the various parts of the financing. This is not something that we can do as a team,” said Traa.

Greece agreed a 110 billion euro rescue with the EU and IMF a year ago. But this assumed Athens could resume borrowing commercially in early 2012, which is now inconceivable as yields on Greek debt are sky high in the secondary market.

Details of the new deal to supersede the May 2010 rescue have yet to be hammered out, but it assumes Greece’s funding needs will be covered by a mix of new EU and IMF loans, budget deficit cuts including tax increases and state asset sales, and a “voluntary” participation by private creditors.

One possibility is that creditors would agree to buy new Greek bonds when old ones they hold mature, meaning that Athens would not have to produce the cash up front.

The managing director of ratings agency Moody’s sovereign risk group said Tuesday it was hard to see how a private sector rollover of Greek debt would be truly voluntary and it would therefore likely constitute a default.

“It’s hard to imagine in the current circumstances that people would voluntarily do this,” Bart Oosterveld told reporters in Paris. “Our default definition contemplates that for something to be voluntary it has to be truly voluntary … More likely than not this would be a credit event in our view.”

The IMF’s Traa warned that a major restructuring of Greek debt would create untold problems in the eurozone but hinted that the IMF was open to other solutions.

“Stretching out payment terms, for instance in loans from euro area partners and the IMF, is a reasonable thing to think about because we have amortization right at the end of the program. This is a technical issue we can think about,” he said.

Greece has already won an extension of the time it has to repay EU loans. The IMF has said it was also open to a similar move but first needed an agreement with Brussels.

Greek sovereign debt totals 340 billion euros or about 150 percent of GDP and Traa said the government needed to move fast on its problems. “Greece is at a critical juncture and has no time to waste, now is not the time to slow down,” he said.

It is unclear whether private sector banks would sign up to such a deal, how much they would be prepared to contribute and whether ratings agencies would look on such a move as a default.

Germany’s BDB banking association said private creditors should only be involved as a last resort and that that point had not been reached yet.

“It is in everyone’s interest that we overcome the debt crisis and that Greece stays in the European monetary union,” BDB President Andreas Schmitz said in a statement, but added: “The involvement of private creditors can come only as a last step.”

 
A version of this article appeared in the print edition of The Daily Star on June 08, 2011, on page 5.

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